Jul 12, 2009 3 min read

It has been more than six years since I first introduced legislation to close the infamous “Delaware Loophole” to create a fairer corporate tax environment for Pennsylvania’s families and small businesses. So far, large corporations have employed the same skill and evasiveness in avoiding the legislation as they have in avoiding paying their fair share of corporate taxes. This year, with the state facing a deficit of more than $3 billion, and small businesses being counted upon the lead the economic recovery that can prevent future deficits, my legislation targeting the loophole is more of a necessity than an option.

Since I introduced Senate Bill 227 in February, the state’s budget crisis has steadily deepened. Many of my Senate colleagues have now joined me in the effort, and we are trying to make the bill part of the final budget package.

If the legislature fails to modernize our corporate tax laws, every Pennsylvania citizen will be forced to make up the difference through potential increases to sales taxes, property taxes, state income taxes and drastic cuts to services.

In Philadelphia and across the commonwealth, residents have already paid a high price. I can remember a day when the streets were lined with small, neighborhood businesses and were crowded with shoppers into the night. While there are several factors that have contributed to the extinction of those hardware stores, office supply stores and toy stores, there is one that we could have – and should have – prevented.

Large, multi-state corporations have been able to create Delaware subsidiaries to which they pay exorbitant rent and royalties so they can write off those expenses on their Pennsylvania tax forms. Today, less than one quarter of Pennsylvania corporations pay any state income tax at all. The state Department of Revenue estimates that half of the companies that pay no tax are using Delaware subsidiaries to hide income from Pennsylvania.

Small business owners had neither the staff nor the time to participate in this shell game, and were forced to pay the nation’s highest corporate net income tax. Given all of the other advantages that scale brings to large retail chains, preserving a tax system that gives them another is unconscionable.

My bill would force these corporations to combine the income of all subsidiaries and portion out Pennsylvania’s share for corporate tax purposes. Such a change would not only level the playing field for businesses, but it would also allow us to gradually reduce corporate income taxes for those who have paid more than their share for decades.

So far, 23 states – a majority of states that impose corporate income taxes – have already closed this loophole, and research shows that those which have done so tend to have higher rates of entrepreneurship.

As Pennsylvania faces the tough choices that come with a deep deficit, ending this corporate tax loophole can help mitigate the damage done by drastic budget cuts. Working families can have little faith in a state government that allows them to suffer for the shifty accounting practices of wealthy corporations.

It is time to assure those families, and the owners of small businesses, that we are willing to take the steps needed to ensure that tax tricks and dodges will not be tolerated, and that we are doing everything we can to maintain critical services.

Sen. Tartaglione, a Democrat from Philadelphia, is the Democratic Chair of the Senate Labor and Industry Committee.